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What is Cryptocurrency?

Steven Schutt | June 29, 2022

The word cryptocurrency is a combination of two terms “crypto” and “currency”.

The term crypto is derived from cryptography. A term that refers to various encryption algorithms and techniques that are used to safeguard information. 

The term currency on the other hand is simply money. Therefore, cryptocurrency is encrypted money. 

Figure: A representation of several cryptocurrencies (source Kaspersky)

Definition of cryptocurrency

Cryptocurrency is a digital type of currency that is underpinned by cryptographic systems. Its operation is fully online hence why most people call it digital or virtual currency. Most cryptocurrencies operate on Blockchain technology which we will discuss shortly. 

Types of cryptocurrencies 

We all know the popular cryptocurrencies like Bitcoin, Ether, Binance Coin, and USDT among many others. However, cryptocurrencies can generally be classified in either of two categories: 

  • Coins and altcoins – this is any digital coin that has its own Blockchain. A good example is Bitcoin and Ethereum. An altcoin is defined as any cryptocurrency that is not Bitcoin. 
  • Tokens – these digital assets utilize another asset’s Blockchain infrastructure. 

 

How do cryptocurrencies operate?

You have a currency that doesn’t have a physical form and is not managed by the central bank. So how does it operate? Well, all cryptocurrencies operate online with each task being distributed among many users via the internet. 

Figure: A representation of Blockchain (source Simon Kucher)

Most cryptocurrencies are based on Blockchain technology. It verifies and permanently records the transaction details. Any changes made must be updated on the Blockchain. Think of Blockchain as a checkbook that is distributed on countless computers all over the world. Once a record has been made, it is impossible to change or reverse. 

Before a transaction is recorded, it is validated either through proof of work or proof of stake validation techniques. The transaction details include the time, date, participants’ details, and amount transacted. Everyone on the network has access to a shared single source of truth. 

Characteristics/properties of cryptocurrencies

It is difficult to describe cryptocurrencies. I mean how do you begin to describe money that cannot be touched and is not controlled by any central power? 

It is neither your traditional mobile banking nor the secret stash of credit cards hidden under your bed. Before you get confused, it is not monopoly money or some in-game currency.

Here are a few properties that will help you understand cryptocurrencies better: 

  1. Highly secured by cryptographic systems – cryptocurrencies utilize encryption mechanisms such as hashing functions and public-private key pairs to secure transactions. It makes it almost impossible to counterfeit or double-spend. 
  2. It is a global system – Cryptocurrencies are increasingly being used for cross-border transactions. Anyone can transact cryptocurrency from anywhere in the world. 
  3. Pseudonymity – the user’s real identity is usually hidden; however, if need arises transactions can be traced back to the user’s wallet or whatever identification they opted for. 
  4. Extremely fast transactions (High scalability) – cryptocurrency transactions only require a couple of seconds to be completed. 
  5. Irreversible transactions – when a crypto transaction takes place and its details are recorded on the Blockchain, it is impossible to undo it
  6. Extreme price volatility – cryptocurrency prices change within a couple of seconds, it can either lead to tremendous profit or loss. 
  7. Immunity to inflation (Fixed supply) – crypto is not managed by any central authority, it is impossible to tamper with its production. People often turn to crypto when their economy is failing. Also, most cryptocurrencies have a fixed supply. 
  8. Decentralization – cryptocurrencies are not governed or supplied by a single central power. They abide by a set of rules that exist within a computer network. Every network participant has a say in how transactions are conducted. This enables online payments without the use the third-party intermediaries. 
  9. Immutability – Once the transaction details have been recorded on Blockchain, it is impossible to change them. This prevents fraud, theft, or any other type of tampering. 
  10. Permissionless – You don’t have to obtain permission from anyone to get started on crypto. It doesn’t matter what country you are from or how much money you have. Anyone is welcome to join

Where do cryptocurrencies derive their value from?

The supply of most cryptocurrencies is deliberately limited. Their demand often remains higher than the supply; this results in a rise in value. Cryptocurrencies can also gain value by being pegged to other assets that are doing well such as oil, real estate, and fiat currency. The best way for a cryptocurrency to grow in value is through media attention. 

How does one acquire a cryptocurrency?

There are two main ways that one can acquire a cryptocurrency: 

  • Mining – This is the process through which most cryptocurrencies are created. It entails solving complex mathematics computations. Once you can solve the computation, you unlock a new coin and subsequently a new block on the Blockchain. A successful miner is rewarded using a fraction of the mined coin. 
  • Purchase – Cryptocurrencies can either be purchased on a P2P basis, on a brokerage platform, or through a crypto exchange. Other places where you can find cryptocurrencies include Bitcoin ATMs, and websites like Local-Bitcoins. 

Are cryptocurrencies legal?

The legality of cryptocurrencies varies from one geographic location to another. Some countries are Crypto-friendly while others are not. Before you do anything, do some research and establish whether they are legal or illegal where you live.

Pros and cons of cryptocurrencies

 ProsElimination of intermediaries and their related costs and failuresHighly secured transactions High speed of transactions High-profit margins Ease of cross-border transactions  ConsThey are not fully anonymous, they leave a trail for security agencies. Popularly used for money laundering and other illicit purchasesTheir ownership is highly concentrated even though they are mascaraed as decentralized. It is very expensive to mine cryptocurrencies and the procedure consumes too much energy. This is not good for the environment. Crypto is prone to theft and hacksTheir prices are extremely volatile 

Uses and applications of cryptocurrencies

  1. Making purchases on retailers that accept cryptocurrencies (standard of exchange)
  2.  Buying a gift card for a loved one
  3. Storage of value (haven during inflation)
  4. Alternative investment option 

Why do most people think it is a scam?

Unfortunately, some government officials, financial specialists, and investors have had a lot of false opinions about cryptocurrency over the years. These uneducated opinions have convinced many investors that crypto is a scam. Hence many potential investors and enthusiasts opting not to get involved. 

Figure: A representation of cryptocurrency scams (source Atamer law firm)

In 2017, Jamie Dimon the CEO of JP Morgan was quoted saying that Cryptocurrency is a scam worse than the tulip bulb. 

He was later backed by Warren Buffet the Berkshire Hathaway CEO who in 2018 claimed that Cryptocurrency is probably worse than rat poison and even though he could buy a five-year put of each cryptocurrency, he would never short a dime’s worth. 

In October of 2018, the title of Nouriel Roubini’s congressional testimony stated that cryptocurrency is the mother of all scams and busted bubbles. It went ahead to say that Blockchain is the most decorated technology ever even though it is no better than a spreadsheet/database. 

  The truth is that all of these claims could not be further from the truth. Cryptocurrency is the future of money. One day our children and grandchildren will ask you what we were doing when money was being reinvented. If I were you, I would choose to be on the right side of history. 

To be fair, there have been some major scams in the cryptocurrency space. For instance, last year the infamous Squid Game coin whose price per coin somehow soared from 1 cent to $2,856 in one week. Sadly, it soon revealed itself as a scam and the developers disappeared with over $4 million.

Conclusion

Cryptocurrencies are getting more attention than any other invention before them. And while they are coupled with a few demerits, they are the future of finance. What are you waiting for? Jump aboard and be a part of the conversation. 

OP-ed disclaimer: The opinions expressed in this article are the author’s own. Cryptyde, Inc. does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be cause by and in connection to it.